Norwegian Oil Production Strangled by Old Rigs and Ridiculously High Salaries

(Bloomberg) — Norway needs to simplify rules for offshore oil rigs and reduce labor costs to support efforts to increase oil and gas production in western Europe’s largest energy exporter, a government-appointed committee found.

Drilling costs in Norway are about 40 percent to 45 percent higher than in the U.K., meaning companies are drilling less and exploitable resources are being left in the ground, Eivind Reiten, the committee’s head, said in Oslo today before handing a report to Oil and Energy Minister Ola Borten Moe.

“You won’t change the big picture unless you do something both with regulations and working shifts,” said Reiten, a former chief executive officer of Norsk Hydro ASA. Drilling costs, which doubled between 2000 and 2010 and may reach 80 billion kroner ($13.4 billion) this year, mean Norway isn’t reaching its potential in terms of oil and gas output, he said.

Norway, the world’s third-richest nation per capita, is trying to boost oil and gas production by expanding into new areas including the Barents Sea off its northern tip. Crude production has dropped by half since peaking at 3.12 million barrels a day in 2000 as output falls from aging North Sea fields, according to the Norwegian Petroleum Directorate.

“We have to look at what they’re doing in the U.K. and what the bottlenecks are, and then consider the relevance of what we have,” Borten Moe said in an interview.

The costs of adapting drilling rigs to operate offshore Norway “have stayed at a disturbingly high level” and authorities need to develop a “very simple procedure” to get rigs cleared for work quicker, Reiten said.

Aging Fleet

Norway also needs more new rigs, with more than half its current fleet being more than 20 years old, he said. In January, the NPD, which oversees the industry, expressed fears that a lack of rigs may cause projects to be delayed, even as expected investment in Norwegian oil and gas climbs to a record 194 billion kroner next year, according to Statistics Norway.

The government must also consider regulations on working hours for offshore personnel, with a reduction in normal working hours having led to an increase in more highly-paid overtime, Reiten said. Under current rules, oil service workers in Norway can legally work 1,582 hours a year before overtime, compared with 2,160 in the U.K., according to today’s report.

Norwegian oil and gas professionals enjoy the world’s highest salaries, with annual pay checks averaging $180,300 — more than double the global average, according to a report published by Hays Oil & Gas this year.

Better Paid

That compares with annual pay of $124,000 for U.S. workers and $87,100 for British oil professionals, according to the U.K.-listed recruiting group.

Oil production from Norway fell to the lowest level in almost 21 years in June after a strike by workers, the first since 2004, disrupted operations. The nation produced 1.502 million barrels a day in June, according to the most recent figures from the NPD. That’s the lowest since August 1991, when the Sleipner platform sank and daily production averaged 1.431 million barrels.

Norway’s LO labor union, the biggest representing oil workers, ended its involvement in today’s report before it was completed, contending that the study of working hours wasn’t part of the committee’s mandate, Reiten said.

– Mikael Holter, Copyright 2012 Bloomberg

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